Information to Escape the Debt Spiral

I can buy her that dream gift but then everybody else on my list gets a fruitcake.

2006-12-10T15:06:00.000-08:00

The winter holiday's are a time to cherish - family and friends get together in celebration and of course don't forget the gift exchanges. The financial difficulties arise shortly after the celebrations are over. Thats when the credit card bills start to arrive and the pain begins. According to the American Research Groups holiday spending survey shoppers are planning to spend an average of $907 for gifts this season. Once January hits the number of consumers that will seek help with their credit card debts from credit counselors is expected to jump by about 40% compared to other times of the year. This is because many of us don't budget for our gift giving. We tend to put it off thinking that there is plenty of time to save. Those that are lucky enough to get cash holiday bonus' normally plan to use that as their gift giving "slush fund." The trick to avoiding the January credit card bill fright is to plan more and shop safely.

A few basic tips even if you haven't saved a fortune:

Determine how much you can AFFORD to spend and then set a specific dollar limit for each persons gifts. You'll have to make some choices here on who really deserves those top dollar presents.
Use the web to find the best deal. Many stores give discounts to online shoppers. There are also many quality price comparison sites such as Shopzilla.com, Pricegrabber.com and MySimon.com. There are also community led "deal" sites like Cheapstingybargains.com and GottaDeal.com
If you have to go into a store than try to avoid the peak shopping times. Other shoppers spending habits tend to rub off on us. Also try to avoid rushing - don't shop on your lunch hour as you'll forget all about your budget and just buy the first thing that catches your eye.
Don't bring your credit cards with you. If you can't afford to pay cash for that gift this month what makes you think you can afford the credit card bill for it next month?
Don't fall for the store credit card offers either. They can be a good deal if you pay them off in full prior to the due date as many of them have a holiday special "no-interest till..." What the fine print tells you is that if you don't pay it off prior to that date you are liable for ALL the interest from the day of your purchase. These "deals" turn bad quickly considering that store card interest rates are normally quite high AND that most of us never pay off our credit purchases in full the first month.
Look for alternative to expensive gifts for everyone on your list. Homemade gifts such as photo albums and scrapbooks can go over quite well. You can also do a Secret Santa gift exchange between family and friends - that way everyone gets a gift but nobody spends a fortune.
Plan for next year by saving your receipts. After the gift buying is completed you add up everything you spent. This is useful for many reasons but one important use is creating your budget for next year. Take the total amount you spent and add 15% then divide that number by 12. Thats the amount you have to save every month to pay for next years season.

If you find yourself in post holiday debt trouble you can always talk to a debt management professional. You can get a debt management referral to one based on your situation at www.debtspiral.com

Why did my credit card interest rate skyrocket?

2006-11-18T00:16:00.000-08:00

Do you know what can happen when you miss a single credit card payment? Well I can tell you it's not anything good. A missed credit card payment can not only effect the rates and payment amounts on the credit card you're late on but also every other creditor that you have relationships with. Many creditors will have a standard default finance charge paragraph (or two) that says something like:

"Finance Charges for Late Payment or NonPayment:
If you do not pay at least the Minimum Monthly Payment by the Payment Due Date one time during the Introductory Period, the Introductory Period will terminate and the Standard Rate stated in the Table of Interest Charges will take effect as of the first day of the billing cycle following your late payment."

You may also be subject to what's now known as a "universal default" clause. This little bit of language basically states that if you're late on ANY payments to ANY creditor it will cause your interest rate on your credit card to jump up to the "penalty rate." That penalty rate in 2005 was around the 24.43% rate. Definately not a rate you would wish for and probably not something you would expect to be paying just because you applied for a new loan.

This penalty rate can be quite a shock since your creditor is under no obligation to let you know that it has been applied - and you may not have even missed a payment on that particular credit card. Some of the events that can trigger this interest rate rise are:
missed mortgage paymentmissed telephone or utility paymentdecline in your credit scoreapplying for a new loangetting a new credit cardbouncing a checkexceeding your credit limit.

Many of the major credit-card companies such as Chase, Citi, American Express and Discover have changed their policies to do away with this universal default clause but you should check your specific credit card terms to make sure that your cards don't have this program.
You can take some basic steps to help avoid a potential late payment trigger by doing things like:

set up auto-drafts for your monthly payments. Don't forget about the time it takes for your payment to process - it can take a few days for the payment to actually register with your creditor.
you can request changes to the payment due date to make it more convienent for you
Just remember that most creditors make their money off of the interest that they charge you - and any reason to increase that interest rate will be taken advantage of.
Try to pay for things with cash first - if you cannot then definately make your payments on time or you may get stuck in a debt spiral of never ending interest payments.
If you are already having troubles with your credit card payments you can try the free debt management referral services of DebtSpiral.com

No Way My Credit Card Costs Me That Much...

2006-10-11T15:49:00.000-07:00

15,000 over 5 cards is about average credit card debt for Americans. The common US credit trap seems to be a combination of too much access to credit with limited education what exactly credit is and how much it ACTUALLY costs. To figure out these costs to you theres some boring math ahead... so prepare yourself.

Until recently your credit card minimum payment was probably calculated at between 2% and 2.5% of your outstanding balance. This meant that you could charge MASSIVE amounts of things you wouldn't normally be able to afford...and still only pay a small amount of money every month. Sounds great right? The problem shows itself when you actually do the calculations. Lets take a $5000 debt at an 18% interest rate (and cue the math)

Suppose we use B(n) to denote the size of the unpaid balance(B) on a credit card after n time periods, which we will take to be measured in months. Thus, the size of the initial loan will be B(0) which we will also denote by L. We will use i to denote the monthly rate of interest, and thus, the monthly interest rate is annual rate divided by 12. (For example, if the annual interest rate is 12% then i is .01.) If the minimum payment due is 2% of the unpaid balance, we can obtain the following difference equation for the situation:

B(n+1) = B(n) + iB(n) -.02B(n)

So,

B(n+1) = (.98 + i)B(n).

This equation can be solved "easily":

For simplicity, use m to denote .98 + i.

Since B(1) = mB(0), and B(2) = mB(1), etc., we can conclude that:

B(n) = m^nB(0). (*)

Now back to the $5000 of our new debt

You spend $5000 at 18% annual interest to take that killer vacation you've always wanted. Now you think lets just pay the minimal amount possible each time so you can also afford your normal stuff, what amount would be left to pay off after one year?

Back to the math:

Since the annual interest is 18 percent, the monthly interest is .18/12=.015.

Hence, B(n) = .995^n(5000) = $4708.12. This is little progress on retiring your debt from one year of payments.

If you think about the situation here you will see that if you only pay the minimum amount the process could go on forever! Can you guess what interest you'll have actually paid for that $5000 vacation after you finally finish with those minimum payments....just about $14,000

The semi-good news is that most credit card companies have recently, at the urging of our federal government, raised the minimum monthly payment percent to a whopping 4%. With that little change our calculation now looks something like this:
B(n) = .975^n(5000) = $3690.00. This 2% change means that after year one of minimum payments you're much better off then the old way - but you are still a long way from wiping out your debt.

Next time we'll look at what happens if you miss a payment but in the meantime if you find yourself in credit card debt trouble you can always get help from DebtSpiral.com. DebtSpiral.com offers free debt management referrals to consumers.